Australia | Jul 08 2008
By Chris Shaw
Signs the Australian economy is under real pressure continue to emerge, with National Australia Bank’s Monthly Business Survey and Economic Outlook for June showing a sharp, and in the bank’s view, unexpected deterioration in business conditions.
The survey showed a seven point fall in business conditions to a reading of zero, putting it a full 20 points lower than its peak in October of last year. At the same time trading conditions and profits also fell sharply while employment fell seven points to a reading of minus 2, its first negative monthly outcome in more than six years and the biggest fall in a six month period since the slowdowns of 2000/01 and 1990/01.
With most sectors recording weaker conditions confidence fell by five points to a reading of minus 9, putting it at its lowest level since a temporary fall related to the terrorist attacks in September of 2001. The bank notes only the mining sector currently has a confidence reading of better than poor, while strength in forward orders in the sector is offsetting weaker forward orders in the retail and other sectors.
Wages growth of 5.3% in June was largely in line with the year to date but purchasing costs continue to rise and were up 5.2% for the financial year, while the survey shows retail prices are also trending higher though still at a lower rate than costs.
The bank’s head of Australian economics Jeff Oughton suggests the figures indicate a significant slowing in domestic demand growth, estimating for 2007/08 it was in the order of 2.5-3.0%. He expects GDP will remain at around the 2.75% level in both 2008 and 2009 with support coming from recent personal income tax cuts, a rebound in farm output and strength in commodity prices.
Even with this support such outcomes would represent a sharp fall from 2007’s GDP of 4.25%, driven largely by a fall in non-farm GDP to around 2.25%. The bank expects non-farm GDP will continue to decline in 2009, falling to around 1.5-1.75%.
Inflation remains a risk with higher oil prices increasing the potential for a further move up, but Oughton expects the Reserve Bank of Australia will look beyond the short-term and keep rates on hold for the remainder of this year before lowering rates in 2009 on the back of slower economic growth and a fall in core inflation. This slowing in growth is expected to trigger an uptick in unemployment, Oughton forecasting an unemployment rate of 4.75-5.0% by late in 2009.
On a more positive note for households, Oughton expects asset prices will pick up over the next year or so, dissipating the negative wealth impact households have felt in recent months. Having had a relatively flat start to the year he is forecasting house prices to pick up by around 4% over the next year, while equity prices should recover by 5-10% in 2008/09.
In terms of the global outlook the bank expects a more prolonged period of slower world economic growth, forecasting a 3.4% increase this year and 3.1% in 2009. Much of this will come from the developing economies as the ending of a long period of demand led growth will have a relatively long-lasting impact on the rate of growth in developed economies such as the US, UK and Europe.
Given inflation remains a concern globally central banks will be forced to consider options, Oughton suggesting while the US Federal Reserve has likely finished easing rates it will be some time before rates are hiked substantially as it will want to see signs the economy and financial system are stabilising before it brings rates back to a more neutral setting.